Euro Drops Versus Yen on Bets ECB to Hold Policy

The euro fell to a five-week low against the dollar after European Central Bank President Mario Draghi made an unprecedented pledge to keep interest rates low for an extended period.

The 17-nation currency dropped the most in almost three weeks versus the yen as Draghi said the ECB’s monetary policy stance will “remain accommodative” for as long as needed to spur growth. The pound slumped the most in almost two years against the dollar after the Bank of England said rising bond yields around the world will weigh on the nation’s economic outlook. The Dollar Index rose a four-week high before the Labor Department releases its monthly job report tomorrow.

“For a central bank that has been reluctant to offer any kind of pre-committal, today’s characterization of forward guidance is about as much as we can expect from the ECB for now,” said Daragh Maher, a London-based currency strategist at HSBC Holdings Plc. “The euro is justifiably lower on this bias to ease.”

The euro weakened 0.7 percent to $1.2914 at 5 p.m. in New York after sliding to $1.2883, the lowest level since May 29. The shared currency dropped 0.6 percent to 129.18 yen. The yen added 0.1 percent to 100.04 per dollar.

‘Extended Period’

“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period,” Draghi said at a press conference in Frankfurt following the central bank’s monthly policy meeting. “Our monetary policy stance will remain accommodative for as long as necessary.”

The ECB took the “unprecedented step” to give forward guidance in a more explicit way than it did in the past, he told reporters. The central bank kept its benchmark interest rate at a record-low 0.5 percent as forecast by all except one of 62 economists in a Bloomberg News survey.

“The key statement from Draghi was that they would remain accommodative,” said Kathleen Brooks, research director in London at Forex.com, a unit of online currency-trading company Gain Capital Holdings Inc. (GCAP) “He’s stressed that the risks to growth remain on the downside. It opens the way now for a move back to $1.28.”

The euro has still gained 4.3 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar gained 6.8 percent, the best performer, and the yen tumbled 8.9 percent.

U.S. financial markets are closed today for the Independence Day holiday.

Pound Slides

The pound fell at least 0.3 percent against all its 16 major counterparts after the Bank of England said increases in market rates aren’t justified and may weigh on growth, prompting speculation it will add stimulus.

The U.K. Monetary Policy Committee kept its quantitative-easing target at 375 billion pounds ($565 billion) today and the benchmark interest rate at 0.5 percent.

“The statement is probably a little bit more dovish than the market was expecting, pushing back on the rise in longer-term interest rates and suggesting that monetary policy will remain accommodative for some considerable time,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London. “This leaves sterling vulnerable against the dollar and the euro.”

The pound slid 1.4 percent to $1.5072, after posting the biggest decline since Sept. 21, 2011. The U.K. currency dropped 0.6 percent to 85.67 pence per euro.

Dollar Index

The Dollar Index rose as economists predicted the U.S. economy continued to add jobs in June.

American employers added 165,000 workers last month, after hiring 175,000 in May, according to the median forecast of 88 economists in a Bloomberg News survey. The unemployment rate declined to 7.5 percent from 7.6 percent, a separate survey showed.

The Dollar Index, which IntercontinentalExchange Inc. uses to monitor the U.S. currency against those of six major trading partners, climbed 0.6 percent to 83.755 after rising to 83.911, the highest level since May 29.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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